Blog on the Run: Reloaded

Sunday, June 27, 2010 2:55 pm

Eye on the ball

A lot of people — some of them sincere but misguided, others of them plotting to shred the safety net and give the proceeds to the wealthiest 1% — are arguing that the deficit is the biggest problem we face.

It is, no kidding, a big problem. But in the near term, unemployment is a far bigger problem. And here’s a memo to politicians of both parties: Americans get that.

So: More jobs, please. Now.


  1. It’s one of the rare issues on which we don’t think (largely) alike, Lex. Aside from a WPA-style program, how can the government create more jobs outside of the public sector? Tax incentives for hiring? Legislation requiring one new job to be created for every $100,000 in additional corporate YOY turnover? I just don’t see how anything the government can do will be sustainable. Deficit reduction, on the other hand, leads to market confidence, which leads to lower long-term interest rates, which lead to stronger economic growth via increased business and consumer confidence, which lead to business investment and expansion, which lead to job creation. I agree that the top two issues facing the US domestically are those identified as Nos. 1 and 2 in the poll. I think the order is reversed, however. After too many years covering US and international economic policy, I believe that in this day and age, if you address the one problem, the solution to the other will be shortly forthcoming.

    Comment by Blair — Monday, June 28, 2010 1:25 am @ 1:25 am

  2. Blair, I would argue that a WPA-style program, updated for today’s needs, is EXACTLY what we need to be doing. If we put people to work addressing these issues, we do two things: 1) We help with the short-term unemployment problem for everyone from highway pavers to engineers and accountants. 2) We also lay the groundwork for the kind of future prosperity that will be an essential element (along with spending cuts and revenue increases) of bringing the budget back under control. We also badly need to get the hell out of Afghanistan and Iraq and cut hell out of defense spending and/or redirect a significant chunk of that money toward more productive investments.

    I agree that deficit reduction leads to lower long-term interest rates. But long-term interest rates are already about as low as they’ve ever gone and show no signs of creeping back up (unsurprising given high unemployment and the slack in productive capacity) — 30-year Treasuries were at something like 3.4% last week.

    Finally, we need to get serious about systemic change to health care. The package enacted this year was a decent start in some ways and will help ease the deficit a bit (all other things being equal) over time, but far more is needed. If we had a health-care system as cost-effective as France’s or Switzerland’s, our deficit would be much more manageable.

    Comment by Lex — Monday, June 28, 2010 10:41 am @ 10:41 am

  3. Which is better:

    1: Shipping manufacturing (and service jobs)offshore to procure cheaper goods, thus removing jobs from the market, reducing government revenues, creating a larger dependent class, requiring greater intrusion by the governmentin the form of “transfer payments”, and higher deficits. Where will the next generation jobs come from?


    2: Accepting as a nation higher prices for consumer goods made in the USA in lieu of higher taxes to support a welfare state. Value added in the country as opposed to overseas. With more people working, revenue streams for the various levels of government remain steadier, reducing the need for an expanding safety net. With predictable revenue streams deficits can be reduced and eventually eliminated.

    Since economists have redefined “inflation” (in the last 40yrs) to simply mean the relative rise in prices for goods and services instead of the classic definition of currency devaluation through increase in money supply, the public have been deceived. The only reason that our currency has not fallen compared to other nations is that they generally have practiced worse fiscal responsibility than the US, and our “Freer” markets have encouraged foreign investments here (at what I believe are long term negative consequences). What good are cheaper goods when you don’t have a job and money to buy them? How can the government sustain this long term without deception?

    To accomplish this we need:

    1: Elimination of ALL tax loopholes, credits, and exemptions and initiate a flat tax structured to exempt those near the poverty level from all but sales taxes. Eliminate all corporate tax loopholes. Legislatures at all levels of government should be banned from exempting ANY individual or enterprise from receiving a tax benefit not afforded to all. Gradually phase out deductions for mortgage interest, property taxes, dependents etc.

    2: There is absoluetly no justification for a tax code that most IRS agents don’t fully comprehend. The only reason Congress keeps the current system is to work their patronage schemes. If the government’s ability to pick who wins and who loses via legislation is removed, almost all the incentives for lobbying are removed.

    3: Recognize that the reasons for corporations shipping jobs offshore are:
    a. Accounting practices designed to hide corporate income from corporate tax rates that are higher here than in other countries, and fudge the books to show more income offshore than in the USA.
    b. Escape excessive intrusion of the government into the workplace.
    c. Some labor unions have “monopoly” power over their industries, and have procured a rise in benefits and wages that have outstripped the general public, and have crippled their industries(UAW).

    4: Regardless of their protestations to the contrary, we do need to separate “investment” banking from consumer banking. Consumer banks speculating on oil futures is a breach of fiduciary responsibility. Excessively low interest rates have not done anything in the last 20 years except entice savers away from saving and into riskier investments, creating bubble after bubble. Even today the Fed is applying this policy. Any retiree who is taking mandatory distributions from a retiremnet account has to accept a risk that contrary to principle preservation.

    There is no justification for creating a system where the manipulation of capital yields a higher return than productive effort. These people have succesfully lobbied to limit their liability for their actions, while “productive” enterprises face increasing liability for their products, services, and employment.
    More and more small businesses are opting to limit employees as a result of a hostile legal and government environment.

    Quite frankly, I would rather pay a couple grand a year more in higher prices for goods and services,and help sustain employment for the nation as a whole than see the wealth of the US sent overseas. I’ll qualify that I don’t want to prop up the UAW while I do it, though.

    Finally, I agree with Blair that reducing the deficit will lead to confidence, but I don’t agree with the policy of artificially low interest rates. That’s a policy that skews the risk reward balance.
    My personal feeling is that we should set a basement of say 4% and a maximum of say 12%, and insist upon conservative underwriting. The credit card issuers say that if they can’t charge higher (18 to 24%)rates then they will have to deny credit to some people, and my answer is good. Those rates amount to usury, and it only serves to place borrowers by and large that accept them in a hole that they often can’t dig themselves out of, but the government endorses this as “keeping consumer spending rolling”. So we have people with poor credit histories subsidizing jobs in China, but by the time the interest is accounted for that same person with a better job would be able to qualify for a better rate and would pay no more for the product made in the USA, when finance charges are factored in.

    I also agree with Lex that unemployment is also an immediate need. The question is how to balance the equation. A WPA or CCC effort is definately a better short term policy in my estimation than just extending unemployment benefits ad infinitem. Labor unions and some private contractors might object, but as far as I’m concerned their interests would be served in the long term, and they need to accept that extraordinary measures are needed. It would be similar to suspending the “Jones Act”.

    Yeah, these are simplistic answers, but hey it’s just an opinion, and we need to take action.

    Comment by Jon A Firebaugh — Monday, June 28, 2010 11:09 am @ 11:09 am

  4. Lex,
    My view is that treasuries at 3.4% is artificially low, designed to spur an economy that’s not going to respond to this type of policy. This is not putting more liquidity in the hands of the average consumer.

    Shoot we have 260+ million in this country over the age of 18. If we had given every one of them $40K with the proviso that up to $30K had to be used to retire 1st short term (credit card etc) debt and then applied to mortgages etc., the banks would have gotten their bailout and the public would be off the hook for a lot of personal debt. That’s a trillion with a greater impaact than the one we got. The remaining 10K would be paid back to the government in taxes depending on an individuals bracket. Some would pay more of this in taxes and others would spend or bank the balance. The spending would stimulate the economy, and the saving would add bank liquidity. Imagine the boost to the economy if every adult American were allowed to eliminate $30K in debt.
    Now I agree that this is somewhat of a reward for bad decisions made by some of the recipients, but why give money to the crooks at AIG (that now looks as though it will never be paid back)so that they can pay Deutche Bank and UBS. How many small bank failures would have been avoided? How many Foreclosures could have been avoided?
    Again this is simplistic. Some of my conservative friends would holler “socialism”, but quite frankly I prefer people welfare over corporate welfare, especially since the big shots had more power and control than the little guys.

    Comment by Jon A Firebaugh — Monday, June 28, 2010 11:52 am @ 11:52 am

  5. Lots of good stuff to chew on, Jon, much of which I agree with. I’ll try to respond in detail tonight. Thanks.

    Comment by Lex — Monday, June 28, 2010 12:45 pm @ 12:45 pm

  6. Jon:

    Shipping jobs overseas v. spending our money domestically: Presented that way, the answer is obvious, but I think our choices are more nuanced than that.

    That said, NAFTA was sold with guarantees that U.S. wages wouldn’t drop toward those of our trading partners, a claim I doubted on both political and economic grounds. Still, we have a kind of lab experiment on file as to what happens when you put a serious damper on international trade: the Smoot-Hawley Act, widely universally believed to have worsened the Depression.

    A flat tax has a lot of appeal; unfortunately, in practice it would worsen the trend of the past 30 years of the upward transfer and concentration of wealth. Moreover, for it to be enacted, 60 senators (because it WOULD be filibustered) and 219 representatives would have to agree to forswear tax policy forever as an instrument of economics and of politics, and I cannot envision a scenario in which that would happen.

    [[If the government’s ability to pick who wins and who loses via legislation is removed, almost all the incentives for lobbying are removed.]] — Well, lobbying on tax matters, yes. There still would be spending and regulatory policy. It would be nice to think lobbyists would dry up and blow away, but …

    Re the corporate income tax: True, the U.S.’s adjusted rate of 32.7% is among the highest in the OECD (only France and Belgium are higher this year). However, many countries with lower corp. income tax rates also have VATs, which the U.S. does not.

    To be able to say that “excessive” government intrusion into the workplace causes companies to ship jobs offshore, you have to 1) define “excessive” in an objective/quantifiable way and 2) show a cause-effect relationship. Moreover, given the many ways in which market-driven “solutions” have come a cropper in the past decade, in areas ranging from mine and oil-well safety to banking regulation and lead in children’s toys, I’d say at this point the burden of proof is on corporations, not the government.

    Re labor unions: It is true that some collective bargaining agreements strain logic. However, management, acting on behalf of stockholders, entered those agreements with eyes wide open and, presumably, superior knowledge of business and economics. Moreover, for the past 30 years, management has done so despite the most unforgiving atmosphere for organized labor since the early 1930s, which is a polite way of saying that the government under both parties has done an overall lousy job of enforcing existing labor law. So forgive me if I don’t have a lot of pity for them, particularly when corporate officers’ compensation has exploded out of all relationship to productivity, stock performance and common sense, because if management can’t win even when the fight is rigged in their favor, maybe they don’t deserve to.

    You are absolutely right about the need to split commercial banking from investment banking. (When Congress repealed Glass-Steagall in 2000, Sen. Byron Dorgan, who’s retiring this year, predicted that the country would regret doing so within 10 years. He was wrong. It only took eight.)

    I would further argue that we need to return to a system in which investment banks are partnerships, not corporations, with partners held jointly and severally liable for their behavior, with their own homes and other assets at risk if they screw up.

    I’m unconvinced of the need to raise interest rates when the economy is still so deeply in the tank, although I agree that artificially low interest rates played a huge role in getting us into this trouble.

    I also agree that credit-card interest is way too high. For a long time it was just a few percentage points above the inflation rate. Then when inflation hit 12% in 1979, the credit card companies jacked their rates up to 18-20% (and had to get law changed in a lot of states to do so). And even though inflation returned to saner levels and pretty much stayed there, those credit-card rates never came back down.

    I’m not arguing that 30-year T-bills at 3.4% is a good thing. But T-bills and the rate the government charges banks for loans (“discount rate”) aren’t the same thing. The latter is something the Fed controls, while the former is affected by market forces. The fact is, the government has no trouble finding buyers for 30-year bills at 3.4%, which suggests that the (generally very sophisticated) investors who buy them do not think inflation is going to become a serious problem at any point in … well, the next 30 years, basically. If it does, the Fed will raise the discount rate.

    Should the stimulus have been targeted more toward individuals and/or direct spending? Yes, absolutely — those are well-known to be more effective at creating jobs quickly than are tax cuts, with which the final stimulus package was too heavily larded. That criticism was leveled at the time, but the tax cuts were the price of getting a bill, any bill, through Congress, at a time when doing nothing was not an option economically (or, for the new Obama administration, politically).

    If the government was going to give money to banks, it definitely should have constructed an enforcement mechanism to see that that money went where it was intended: to provide credit for (mostly small) businesses who were good credit risks but couldn’t get a loan because everyone was panicking.

    In the particular case of AIG, the government either should have nationalized it and forced its counterparties (primarily Goldman Sachs), stockholders and bondholders to take a serious haircut before fixing it and selling it back to private investors, or it should have made such haircuts a condition of any bailout. Instead the government gave AIG a massive bailout with no strings attached, primarily because of lobbying of former Goldman execs (primarily Geithner) by current ones. People both in and out of government should have gone to prison for that.

    Good discussion!

    Comment by Lex — Monday, June 28, 2010 11:01 pm @ 11:01 pm

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